A Nobel Laureate on the Limits of Evidence-Based Policy
Lars Peter Hansen and Kevin M. Murphy discuss how data can inform policymaking.
A Nobel Laureate on the Limits of Evidence-Based PolicyProspective employers sometimes ask applicants for credit-history information, which has generated concern—and a fair number of anecdotes—about bad credit creating a hurdle for job seekers. But Chicago Booth’s Neale Mahoney, together with his coauthors, looked at what happens when a bankruptcy flag is removed from someone’s credit report. Though predictably, access to credit improves, the researchers find that the removal of the flag has virtually no impact on employment, wages, or the likelihood of finding a better job.
(upbeat music) Neale Mahoney: So we got interested in this idea because we read a number of news stories where the journalist would interview somebody who was interviewing for jobs and thought that he or she did well in the interview process, and then the employer asked to run a credit check, and then the person never heard back. After reading those articles, we became interested in trying to figure out: Was this a small number of isolated incidents? Or was this the tip of the iceberg, and that there was a large number of individuals who were not able to get a job because of derogatory marks on their credit reports?
It’s pretty obvious we weren’t the only people who were reading this press. [US senator from Massachusetts] Elizabeth Warren proposed legislation to address this issue. I think it was either 10 or 11 states passed legislation to restrict credit checks, at least for some forms of jobs. My coauthors and I set out to figure out: What are the effects of a bankruptcy flag on credit market outcomes and outcomes in the labor market?
Part of what allowed us to do this project is one of my coauthors is an economist for the New York Fed and has access to this phenomenal credit-bureau information. And then a second one of my coauthors works at the Social Security Administration, and he has access to wage and employment data.
So we find that when a bankruptcy flag gets removed from your credit report, access to credit increases by a large amount. What we also find, however, is that when these bankruptcy flags are removed, there’s no impact on labor-market outcomes. You have the same likelihood of having a job. Your wage doesn’t go up. You’re not any more likely to transition from a bad job to a good job. Everything is zero.
So to be completely honest, we were surprised by the results. We didn’t think there would be an enormous negative effect of having a bankruptcy flag on your credit report. But because of the anecdotal evidence, we thought there would be some effect. And the question was how big that effect is. And so we hammered away until we convinced ourselves that there was no possibility that there was a positive effect.
So what’s the takeaway from this analysis? The takeaway is that limiting the ability of employers to use this information isn’t going to matter much either for good or for bad. If you have a law on the books, probably not worth a huge amount of effort to remove it. It’s not going to improve the efficiency of hiring. But if you don’t have a law on the books, it probably isn’t worth a huge amount of legislative effort to put a law into place because it’s not going to affect things either for better or for worse.
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